Page 5: Diversification
Diversification strategies involve widening an organisation’s scope across different products and market sectors. It is associated with higher risks as it requires an organisation to take on new experience and knowledge outside its existing markets and products. The organisation may come across issues that it has never faced before. It may need additional investment or skills.
On the other hand, however, it provides the opportunity to explore new avenues of business. This can spread the risk allowing the organisation to move into new and potentially profitable areas of operation.
Enterprise’s values help to define what the organisation stands for. They also identify its capability and competences. Its core values of ‘brand, honesty, service, fun, hard work, listening, inclusion and community’ are transferable. This means that the skills from the main business can be applied to other business opportunities through diversification, potentially reducing the risks associated with this strategy. Examples of Enterprise’s diversification strategies include:
- Car Sales was established by Enterprise in 1962. This business involves selling used cars to both the public and businesses. It is now one of the largest sellers of used cars in the USA.
- In 1974 Enterprise purchased Keefe Coffee Company, which later developed as the Centric Group. The 1973 energy crisis had created uncertainty for Enterprise. As fuel became scarce and expensive, many customers swapped large cars for smaller and more economical vehicles. This led to a collapse of sales in the used car market. Enterprise relied on that market to sell on its vehicles. The future of the business was not certain and so Enterprise diversified to buy Keefe. It was hoped that acquiring small, underdeveloped businesses, would generate more opportunities for Enterprise.
- In 1977 Enterprise invested in Mexican Inn Chili Products. However, the company had little experience of both the packaged goods industry and the packaged food business. Poor sales and a guaranteed buy-back arrangement with retailers (where unsold goods could be returned) meant that the business did not make a profit. Therefore the company sold the business but learned a lot from the experience.
This last example illustrates the risk that diversification poses. Just because a business is successful, like Enterprise, it can never guarantee success in every venture it undertakes. However, the experience with Mexican Inn did not put Enterprise off later acquisitions that were outside the car rental business, for example, TRG Group which is a leading manufacturer of luggage, backpacks and travel accessories.